Essays in Investments

Thesis advisor: Jeffrey PontiffThe first essay of this dissertation studies the effect of Exchange Traded Funds (ETFs) on the yields and liquidity of the underlying corporate bonds. I find that ETFs lower the yield, have an insignificant or negative impact on the liquidity, and decrease the retail volume of constituent bonds. Overall, these results support theoretical predications that basket securities entice liquidity traders to exit the underlying market. The second essay analyzes the role of ETFs in mutual fund families and is joint work with Harold Spilker. We study mutual fund and ETF twins - index funds from the same family that follow the same benchmark. Mutual fund twins are shown to have lower tax burdens, long-term capital gains yields, and unrealized capital gains. Conversely, ETF twins have higher long-term yields and unrealized capital gains, but are compensated with lower expense ratios. Fund families benefit because twin offerings generate higher flows than their non-twin peers. These results support previous research that mutual fund families use diversification and subsidization to benefit the overall family. The third essay provides academics with a detailed understanding of the history, structure, regulation, and prospects of ETFs. The essay documents that the growth of index investing can largely be attributed to ETFs. The information and nuances discussed provide a baseline for developing future research questions and data.Thesis (PhD) — Boston College, 2015.Submitted to: Boston College. Carroll School of Management.Discipline: Finance